Navigant Research Blog

In articles, op-eds, and books like Power Hungry, Robert Bryce has become America’s foremost skeptic of renewable energy generation. It’s not that Bryce doesn’t like wind, and solar, and biofuels; he just scoffs at the notion that they are going to provide enough power, at low enough prices, over the next few decades to make a dent in energy demand. (Disclosure: when Bryce was editing the website Energy Tribune I contributed a few articles, and his work is mentioned in my new book SuperFuel.) Now Bryce has written an article for Slate demanding to know why President Obama is so “blind” to the big production surges coming from domestic oil and gas resources.

In 1990, Bryce writes, the United States had 33.8 billion barrels of proven oil reserves. Today that figure stands at 31 billion barrels. Over the two decades from 1990 to 2010, “the domestic oil sector produced about 52 billion barrels of oil. In other words, between 1990 and 2010, the United States produced nearly twice as much oil as we believed the whole country had in 1990, and yet at the end of that period, we still had about the same amount in proven reserves. What’s going on?”

The answer, of course, lies in the “shale revolution” – the technological advances that have allowed producers to wring oil and natural gas from so-called “tight rock,” reserves that 10 or even five years ago would have been uneconomic to produce. So far, this is inarguable. But Bryce, who has a penchant for drawing sweeping conclusions from data that could be interpreted in varying ways, goes on to claim that Obama is not only anti-Big Oil but is ignoring (or ignorant of) the economic and geopolitical ramifications of the shale revolution. Obama is “wrong about what those percentages mean, and his wrongness reflects a fundamental misunderstanding of the oil and gas industry.”

The Innovation Debate

There are two things wrong with Bryce’s argument. No. 1 is that Obama is hardly blind to the achievements of the domestic oil and gas industry. To be sure, Obama has tried to balance political demands from his Democratic base with the oil industry’s demand for more pipelines and more drilling. But here’s part of Obama’s Jan. 18 statement when he essentially put off a decision on approval for the Keystone XL pipeline expansion: “This decision … does not change my Administration’s commitment to American-made energy that creates jobs and reduces our dependence on oil. Under my Administration, domestic oil and natural gas production is up, while imports of foreign oil are down. In the months ahead, we will continue to look for new ways to partner with the oil and gas industry to increase our energy security –including the potential development of an oil pipeline from Cushing, Oklahoma to the Gulf of Mexico – even as we set higher efficiency standards for cars and trucks and invest in alternatives like biofuels and natural gas. And we will do so in a way that benefits American workers and businesses without risking the health and safety of the American people and the environment.”

That is hardly the language of a man ignorant of rising domestic oil and gas production. Obama wants to move toward a non-fossil-fuel energy system while producing domestic oil and, in particular, natural gas to fuel U.S. industry and create jobs. Even Bryce would have a hard time arguing with that strategy.

The No. 2 caveat to Bryce’s Slate article is that the following statement is blatantly untrue: “Over the past few years, the oil and gas sector has out-innovated the political darlings of the moment: solar and wind energy.” Innovation in the wind and solar sectors has been second to none, without the increasingly apparent environmental damage that hydraulic fracturing, or fracking, is causing in tight-rock oil and gas production areas. As my colleague Peter Asmus has pointed out, the price of power from solar photovoltaic arrays has declined to near grid-parity levels, even as federal subsidies are being phased out. Bryce strays into ignorant territory himself when he suggests that the practice of pumping chemicals into the ground to break up geologic shale formations is somehow more “innovative” than the rapid advances in solar technology.

In reporting for a cover package on the natural gas boom for Fortune, I spoke to John Deutch, the former CIA director, now an Institute Professor at MIT. Hardly a tree-hugger, Deutch is all for the economic benefits of the shale revolution; but he sees it through a wider lens than Robert Bryce.

“I recently chaired a committee studying the environmental impacts of shale gas production,” Deutch told me. “We came to the very strong conclusion that those impacts have to go down over time if the U.S. is going to support those advances in production.

“Air quality, water quality, community effects – these are very important issues. What concrete action are we taking to reduce those problems? The answer is, ‘Not enough.’”

Taking a measured approach to energy policy, even as cheap natural gas floods the market, is what presidents are supposed to do. There’s nothing blind about that.

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When it comes to navigating the advanced biofuels’ winding pathway to commercialization, no company is faring better than Solazyme. Whether delivering biojet fuel for commercial flights or producing hundreds of thousands of gallons of advanced fuels to help the U.S. Navy launch its Green Strike Force in 2016, Solazyme has been on a marketing tear.

The company has also unveiled a steady stream of partnerships, with companies such as Unilever and Chevron, in the last few years, securing its place among the companies to watch in biofuels. Earlier this month, the company made a splash at the Advanced Biofuels Leadership Conference in Washington, D.C., where it announced a new joint venture with Bunge Global Innovation, a subsidiary of agribusiness giant Bunge. The partnership will build, own, and operate a commercial-scale renewable tailored oils production facility in sugarcane-rich Brazil.

But caught in the backwash of the attention and hype surrounding Solazyme is a more troubling development: the skewing of expectations around algae commercialization.

Not quite an algae company – “traditional” algae companies rely on CO2, sunlight, and water as inputs – Solazyme uses an algae platform that relies on cheap sugars, which it feeds to microalgae in closed steel fermentation tanks. The sugar-dependent algae platform coupled with the company’s genesis in the traditional algae space no doubt contributes to its characterization as an algae company.

More accurately, it sits alongside a slew of promising companies chasing cheap sugars, including venture-backed startups like Amyris, LS9, and Codexis. All of these companies have proven adroit at straddling the chemicals and fuel markets. As discussed in Pike Research’s Biofuels Markets and Technologies report, these companies stand out in the advanced biofuels industry, rebranding their companies around the production of “renewable” or “tailored” oils. More importantly, they are on a very different commercialization trajectory than the algae-to-fuels industry.

Like any good Shakespeare character worth his salt, Solazyme has expertly used appearance versus reality to its advantage, aligning itself with algae when the industry is hot, and distancing itself when it’s not. Meanwhile, the long-term impact of the “Solazyme Effect” on the algae industry remains unclear. On one hand, the company’s recent success has provided important cover for a young algae industry still clawing its way towards commercial viability in the harsh, post-Solyndra landscape; on the other, the Solazyme Effect may be feeding unrealistic expectations about algae’s near-term potential. If the Solazyme star flames out, the algae industry could suffer collateral damage, further delaying development timelines.

Green Crude Outlook

With or without Solazyme, though, things are starting to heat up for green crude. Promising companies like Sapphire Energy and Origin Oil are making headway. As with any new technology, the real test for the algae industry will be managing expectations while marching towards commercial viability.

At the end of the day, what algae has going for it is (potential) scale and infrastructure. As a biofuels platform capable of producing fuels that can be dropped-into existing pipelines and engines – ground, aviation, or otherwise – the road to commercialization is less onerous from a marketing standpoint than it has been for ethanol or first-gen biodiesel. And as a renewable energy platform, algae could very well be one of the killer apps that enhances our existing energy infrastructure by cleaning up wastewater or soaking up CO2 exhaust from industrial facilities.

But all this will take time and money. As Katie Fehrenbacher rightly notes in a recent article at GigaOM, it’s a long, long (long) road for algae fuel. Pike Research’s Algae-Based Biofuels report projects that biofuels production from algae will rise to just 61 million gallons by 2020, partly owing to early production being soaked up by low-volume, high-value markets like biochemicals and nutraceuticals. Although we profiled Solazyme in the report, the company’s production forecasts did not factor into our global projections.

For those looking for relief at the pump in the near-term, don’t hold your breath as we don’t see much change in these projections, especially given the growing emphasis on production for non-fuel markets in the near-term. Nevertheless, algae’s long-term prospects continue to shine.

Demand response programs to date have largely relied on a labor-intensive approach that has required operators in different customer sites to manually turn off lights, HVAC equipment, and other energy consuming systems to control peak demand and balance loads on the grid. Automated demand response (Auto-DR) systems have become an important alternative to conventional DR by automating the communication and dispatch systems to respond to event and price signals from a utility, grid operator, or a curtailment services provider (CSP) – often in minutes or even seconds. Although it has already been used by the utility industry for many years, it has not been widely deployed. However, with the upcoming launch of a non-proprietary, open communications standard for Auto-DR, referred to as OpenADR, this situation is likely to change.

OpenADR 2.0 is expected to be ready for full-scale implementation in the coming months. It is currently the only existing open data model to bridge communications between a utility and control systems in commercial, industrial and residential facilities. It has been used by a number of utilities and independent systems operators in the U.S. While California has been the primary state for OpenADR implementations, it has also been adopted by other U.S. utilities to enable their Auto-DR programs. So far, OpenADR has been either piloted or implemented by Seattle Power & Light, NV Energy in Nevada, City of Tallahassee in Florida, Bonneville Power Administration in Oregon, and most recently Hawaiian Electric Company in Hawaii, which is undertaking a pilot with Honeywell to demonstrate how DR can help integrate intermittent renewable energy into the grid. It has also been tested by software developers in Canada and Spain, and is currently being piloted by Honeywell for utilities in China and the United Kingdom.

The introduction of a uniform standard in the Auto-DR market will help lower the cost of technology as well as the services, including maintenance, associated with these tools. So far, more than 60 building controls vendors have developed products with OpenADR. Second, it will improve the reliability and predictability of Auto-DR because using an Internet-based interface and communication standard will eliminate the reliance on person-to-person interaction between the utility’s personnel and facility management. Third, standardizing a message format will increase the interoperability, efficiency and reliability of DR systems. As a result, both the National Institute of Standards and Technology (NIST) and the Federal Energy Regulatory Commission (FERC) have endorsed OpenADR as a key smart grid standard. And the OpenADR Alliance, a nonprofit organization, has been created to promote the development, adoption and compliance of the standard across the utility industry. “Through this member-represented organization, the OpenADR Alliance, and significant support, OpenADR 2.0 has certainly the potential of accelerating Auto-DR adoption across the globe,” said Barry Haaser, managing director of the OpenADR Alliance.

As I wrote last month, global biofuels production is nearing 2 million barrels per day – an impressive number that ranks biofuels ahead of Libya among oil producing nations – but most of this consists of conventional biofuels derived from corn starch and sugarcane. While these fuels may meet ground transportation needs, they lack the performance characteristics required by jet engines.

For end-users such as commercial airlines and the U.S. Navy, demand is focused squarely on advanced drop-in biofuels, which are fungible with existing petroleum infrastructure and derived from non-food feedstocks. Led by industry stakeholders such as Boeing, Airbus, and Embraer, industry consortia involving airlines, nonprofits, government agencies, and trade groups have set a course to ramp up the use of advanced biofuels over the next decade. With the long shadow of rising oil prices and EU’s Emissions Trading System looming, for these players, market share and profitability are at stake. The U.S. Navy, which is focused more on security, has been at the vanguard in driving biofuels innovation and has set its sights on deploying the “Great Green Fleet” in 2016, composed of vessels and ships powered by advanced biofuels.

While advanced biofuels may skirt the image problems of conventional biofuels – a dubious connection to rising food prices and land use change – they have so far proven incapable of meeting end-user demand. The bruising road to commercialization has raised difficult questions about which pathways commercial airlines and the Navy should pursue. Eschewing conventional biofuels, and lacking a sufficient fuel supply from advanced pathways, these customers are caught between a rock and a hard place.

Enter alcohol-to-jet, or ATJ, which has gained traction as an alternative advanced biofuels pathway for meeting demand from aviation and military customers. By fermenting agricultural residues and woody biomass in an advanced process similar to conventional ethanol production, ATJ (along with its precursor, isobutanol) is emerging as an appealing pathway for advanced biofuels and biojet commercialization.

For ATJ to be viable, however, it all comes down to cost. As Jim Lane of Biofuels Digest notes, costs are only estimates at this point; price parity is a threshold that has yet to be realized. While ATJ holds significant promise, a number of competing pathways also show commercialization potential.

Advanced biofuels derived from oilseeds and algae, which fall within ASTM’s Bio-SPK jet fuel spec, are the only aviation biofuels pathway certified for commercial use today. While companies like Solazyme have delivered some gallons meeting ASTM’s Bio-SPK jet fuel spec, this is a far cry from the scale of supply needed to offset petroleum dependence in a significant way. Long-term, there are serious doubts as to whether oilseeds can supply demand at a cost competitive to petroleum-based jet fuel.

Scale is one advantage ATJ has over other pathways. Unlike camelina and jatropha – key feedstocks used in producing Bio-SPK fuels that depend on farmer’s willingness to plant the crop in the first place – agricultural residues and woody biomass are already available in abundance throughout the world. Companies like Virent, Gevo, and ZeaChem are targeting these feedstocks, with commercialization slated for mid-decade.

Regulatory hurdles must still be overcome. ASTM is currently testing ATJ with certification expected sometime in the next few years. Without this certification, these fuels have no pathway to commercialization.

Ultimately, ATJ is expected to play a key role in the aviation biofuels mix. There is no silver bullet, but ATJ should provide part of the advanced biofuels silver buckshot mix.